Moving Towards a New Era in Corporate Governance Research Methods

Transcription

1 Journal of Modern Accounting and Auditing, ISSN July 2012, Vol. 8, No. 7, D DAVID PUBLISHING Moving Towards a New Era in Corporate Governance Research Methods Ovidiu-Niculae Bordean, Anca Borza Babes-Bolyai University, Cluj-Napoca, Romania Corporate governance is a relatively young field. Nonetheless, the research in this domain has been growing at an impressive speed in recent decades. Analysis of corporate governance has become a key factor in our understanding of corporations in recent years, and an indicator of investor confidence in the decisions is taken by the managers and board of directors of the listed companies. This paper evaluates both qualitative and quantitative techniques that are implied in corporate governance field. The methodological techniques are a key element of the research process. In this article, the authors developed a content analysis of the published empirical research in order to expose a possible gap between what is currently done versus what needs to be done in terms of the techniques of data analysis used in corporate governance field. The results of this study allow the authors to draw some valuable conclusions regarding the trends in methodological techniques that support the evolution of corporate governance. The findings indicate that, in general, the researchers are inclined to more sophisticated quantitative techniques. However, the use of qualitative techniques remains preponderant among corporate governance scholars. Keywords: corporate governance, qualitative research, quantitative research, methodological techniques Introduction In recent years, the topic of corporate governance has gained prominence as a result of the large number of attention-grabbing corporate scandals at the board level. What was formerly a topic of interest to academics has now become a burning issue worldwide for researchers and practitioners alike. With the growing interest of researchers in corporate governance field, a proper understanding of the methodological issues becomes a necessity. According to Sekaran (2007), the knowledge of research methods was important, because it helped people in organizations to understand, predict, and control their internal and external environments. On the other hand, the knowledge of research methods may be useful in clarifying, validating, and building theories for researchers. This article addresses the following research questions: (1) What are the main methodological techniques (both qualitative and quantitative) that are used by researchers in corporate governance? Acknowledgement: This work was supported by the European Social Fund through Sectoral Operational Program Human Resources Development , project number of POSDRU/89/1.5/S/59184, performance, and excellence in post-doctoral research in Romanian economics science domain. Ovidiu-Niculae Bordean, assistant professor, Ph.D., Management Department, Babes-Bolyai University. ovidiu.bordean@econ.ubbcluj.ro. Anca Borza, professor, Ph.D., Management Department, Babes-Bolyai University.

2 1082 MOVING TOWARDS A NEW ERA IN CORPORATE GOVERNANCE RESEARCH METHODS (2) Is there a general trend in terms of the evolution of methodological techniques used for assessing corporate governance during the time? The paper starts with an overview of various issues related to corporate governance from both a practical and a theoretical approach and an assessment of the methodological techniques from a theoretical point of view. Afterwards, an analysis of methodological techniques that has been applied by researchers is made by using a sample of articles published in Corporate Governance the International Journal of Business in Society, a journal that is famous for its focus on publishing high-quality papers on specific issues linked to corporate governance. Some analytical remarks follow in the paper, and conclusions are drawn in the end. Theoretical Background There have been numerous attempts for defining the term corporate governance. For instance, Lynall, Golden, and Hillman (2003) had considered corporate governance as a set of mechanisms which were used to manage the relationship among stakeholders that was used to determine and control the strategic direction and performance of organizations. At its core, corporate governance was concerned with identifying ways to ensure that strategic decisions were made effectively (Desai, Kroll, & Wright, 2005). Depending on the value system prevailing in a particular country or context, corporate governance has been seen to deal with the protection of shareholders rights or... the rights of all, or at least a part of the stakeholders (Wentges, 2003, p. 35). In research and in practice, the common assumption was that there were just two basic models of corporate governance systems: the first model is the Anglo-American market based model, which emphasizes the maximization of shareholder value; while the second model is the relationship-based model, which emphasizes the interests of a broader group of stakeholders (Hasan, 2002, p. 78). Corporate governance mechanisms occasionally fail to adequately monitor and control top-level managers decisions. This situation has resulted in changes in governance mechanisms in corporations throughout the world, especially with respect to efforts that are intended to improve the performance of boards of directors. These changes often cause confusion about the proper role of the board. Evidence suggested that a well-functioning corporate governance and control system could create a competitive advantage for an individual firm (Carney, 2005). For example, one governance mechanism the board of directors had been suggested to be rapidly involved into a major strategic force in US business firms (Nicholson & Kiel, 2004). In practice, corporate governance draws attention because of some failures and misunderstandings. For instance, Hilb (2006) identified four main causes that accounted for the public s crisis of confidence in corporate governance: (1) In the technological sphere, the main driver of corporate governance is considered to be the dot-com bubble. There is no doubt that the Internet represents a major breakthrough. But according to Taylor (2003) it couldn t be seen as new business model, in fact it was a tool in managers hands which was used to build their business if they knew how to combine it with distinctive products or services; (2) In the economic sphere, there are the corporate governance scandals that draw attention to the way, in which board of directors know to make use of their power. The cases of Enron, WorldCom, Global Crossing, and Arthur Anderson are just some of the many companies that have gone through the greatest stock market collapse in US in its entire history;

3 MOVING TOWARDS A NEW ERA IN CORPORATE GOVERNANCE RESEARCH METHODS 1083 (3) In the risk management and ecological sphere, numerous collapses (such as Swissair) or strategic mistakes (such as Vivendi-Universal or AOL Time Warner) have shown that board members approve strategies that are too risky; (4) In the social sphere, there has been a striking lack of integrity exhibited by those who are responsible for directing and controlling corporations. If the authors shift the attention to the research approach, they may easily see that corporate governance have suffered a lot due to the misunderstanding and misusing of the underlying theories that dominate this field of study. For example, the often-applied agency theory manages to raise numerous criticisms in the past years: (1) It was considered that the agency theory unrealistically assumed that earnings and stock prices couldn t be manipulated (Brecht, Bolton, & Röell, 2002); (2) Traditional agency theory builds primarily or exclusively, on extrinsic motivation; (3) Only the needs of top executives and shareholders (and in the worst case only the needs of top executives) are taken into account, but not justifiable needs of employees, customers, or the environment. Because of these reasons, it is considered that the research of the corporate governance should take into account the diverse roles that board of directors play and the other theories that govern this domain. For instance, the resource dependency theory is based on the premise that board members can play great roles in making resources available and in coaching the chief executive officer (CEO). Stewardship theory suggests that top managers can act in the best interests of the company even when financial incentives and monitoring systems are not in place to ensure that this is the case. In such cases, the role of the board members shifts from monitoring to supporting in strategy formulation and implementation at a high level. And finally, institutional theory, attempts to understand corporate governance in the context of social and cultural constraints which are imposed on organizations. Researches on distinct data s analytic methods are quite frequent in the devoted literature, for example, Hitt, Gimeno, and Hoskinsson (1998) and Shook, Ketchen, Cycyota, and Crockett (2003) conducted researches on the specific analysis techniques which were asserted to strategic management field, whereas other scholars were more interested in finding out how the field of entrepreneurship evolved through the eyes of quantitative analytical tools (Chandler & Lyon, 2001; Dean, Shook, & Payne, 2007; Crook, Shook, Morris, & Madden, 2010). The authors have already seen that corporate governance striking as a new field of study is very fruitful for anyone who is interested in conducting research within its boundaries. Knowing what the limits are, the tools and the general trends in specific domain are the first step to realize a high quality research. Research Methodology In order to find answers to the research questions addressed in this paper, the authors have collected and coded data from an international journal Corporate Governance the International Journal of Business in Society, which has main focus on publishing high-quality articles on various topics related to corporate governance. Being international and inter-disciplinary in scope, this journal seeks to provide a platform for debate amongst diverse academic and practitioner communities which address a broad spectrum of corporate governance issues and disciplines in different parts of the world. The journal is published by Emerald Publishing Group and is indexed and abstracted in several international databases. Although this is not the only journal

4 1084 MOVING TOWARDS A NEW ERA IN CORPORATE GOVERNANCE RESEARCH METHODS which publishes articles on corporate governance, the authors limit the investigation to this journal as it is recognized as having a mission statement on corporate governance. The authors have selected a sample of 93 articles that are published in Corporate Governance during three periods of time 2001, 2005, and 2010 respectively. The authors have selected these periods of time as they are interested not only in assessing the different methodological techniques used in corporate governance, but also in identifying different trends related to them. This sample represents approximately 80% of the total articles published during the three abovementioned periods of time, because the authors exclude those conceptual theoretical articles from the sample. Following procedures in similar studies (Shook et al., 2003; Dean et al., 2007), the data that had been used to sustain each article s methodology were coded. For example, if a study is reported by using regression analysis as primary method to test hypothesis, the authors will code it and include it in the sample. The articles are classified into two categories: The first category contains articles that use qualitative techniques; and the second one contains the articles that use qualitative techniques. As the number of articles that have used mixed methods is small, we decide not to include those articles in the sample. Summary of the Results After the first set of analysis, the authors are able to draw some conclusions regarding the articles that the authors have included in the sample. In terms of the topics addressed by the researchers, the authors see that a great emphasis is put on studying board composition, leadership issues, firm performance and their connections to corporate governance. The results concerning the data sources, level of analysis and company s sector are shown in Table 1. Table 1 Data Sources, Level of Analysis, and Company s Sector Data source Primary data only Survey only Interviews Secondary data only Mixed primary and secondary data Level of individuals Individual Group Firm Other Company s sector of activity Private-owned State-owned Not-for-profit 2001 N = 19 (%) N = 31 (%) N = 43 (%) In terms of data collection, at the beginning of 2000s, the researchers have a preference for primary data. At the end of 2000s, primary data remain a favorite source only at the time when there is a high increase in using secondary data (25.58%) and interviews (16.27%) for collecting the information. There will be no surprise to see an increase in using surveys when gathering information as quantitative methods becomes popular at the end of 2000s.

5 MOVING TOWARDS A NEW ERA IN CORPORATE GOVERNANCE RESEARCH METHODS 1085 The majority of the researchers during all the three periods focus their research on a firm level as they are interested in testing hypothesis and applying surveys to companies. As for the type of activity sector, the studies are done on private owned companies (approximately 75% for each of the three periods of time is analyzed). Still, corporate governance issues are also addressed in state owned companies and not-for-profit companies, as a proof that corporate governance is not only for private companies or for listed companies. In order to check if there is a trend in terms of the methods used by researchers, the authors have computed periodic percentage use indices (PUI) for each method, either qualitative or quantitative. The authors have divided the frequency of use for each method by the number of articles coded per period. Thus, an index of 0.02 indicates that 2% of the studies rely on a focal method. To assess the trend in use of methods over time during a time period, the authors have computed correlations between years and annual PUI values for each method. The correlations are presented in Table 2 along with PUI values for the three periods of time. The authors have decided to group the qualitative techniques into four categories: (1) participant observation; (2) direct observation; (3) structured interviews; and (4) case studies. When analyzing the data in Table 2, one can easily see that in terms of qualitative methods, only direct observation tends to be correlated negatively (or indirect) with the year of publication. At the same time, the use of unstructured interviews and case studies show that they are not only directly correlated with the year of study, but also have a very strong relationship between the two variables (as the correlation coefficient is close to one). The authors have observed a strong direct correlation between the use of unstructured interviews and the use of case studies and the year of publishing which allow the authors to consider these as two qualitative methods that will be used more frequently in future by researchers. For each of the three periods, the most popular quantitative methods were: (1) Period 1 (2001): Frequencies and regression analysis; (2) Period 2 (2005): Frequencies, regression analysis, and factor analysis; (3) Period 3 (2010): Frequencies, regression analysis (including multiple regressions and logit regression), t-tests, and factor analysis. Table 2 Qualitative and Quantitative Techniques and Correlation With Year Overall 2001 PUIs 2005 PUIs 2010 PUIs Correlation with year Qualitative methods Participant observation Direct observation Unstructured interviews Case studies Quantitative methods Frequencies 0, Regression analysis Anova t-tests Factor analysis Chi-square test Correlation analysis

6 1086 MOVING TOWARDS A NEW ERA IN CORPORATE GOVERNANCE RESEARCH METHODS If the authors take a look at the quantitative methods implied in the articles from the sample, the authors shall see that there are two techniques, namely frequencies and Anova that have an indirect correlation with the year. This means that researchers tend to use other methods as the time passes at the expense of the two techniques. When analyzing the data in Table 2, the authors might assert that corporate governance is moving beyond traditional tools such as simple frequency calculus (r = ). However, the results show that regression analysis remains the dominant quantitative technique implied in corporate governance. At the beginning of 2000s, the regression analysis was used in 14% of studies, whereas at the end of the 2000s, it accounted for 22% of all studies. The use of that technique is highly correlated with the passage of time (r = 0.997). Even though there are techniques that are strongly and directly correlated with the year, the researchers still make less use of them. For example, the authors have found a strong and direct correlation between the use of t-tests and correlation analysis, and the time passage (r = 0.984, respectively r = 0.992), and yet these are quantitative techniques which are seldom used in the study of corporate governance (in 3% of the overall studies, respectively in 1.3%). Concluding Remarks The study has proved that there is an increasing preference for applying more sophisticated quantitative techniques. The increased use of more specialized techniques whose capabilities and assumptions better reflect the nature of corporate governance phenomenon is encouraging vis a vis development of knowledge. However, the use of quantitative techniques in corporate governance remains at a low level, whereas the qualitative techniques are preferred by the researchers. The results of the study need to be perceived in the light of their limitations. First of all, the authors have focused the research attention only on a small part of what constitutes the corporate governance s existing literature. Secondly, the authors have assessed only those qualitative and quantitative techniques that outstand from the general corporate governance literature. Thus, the authors consider that the study can be improved in future by scanning other studies published in corporate governance journals. References Brecht, M., Bolton, P., & Röell, A. (2002). Corporate governance and corporate control. ECH Working Paper Series in Finance. Carney, M. (2005). Corporate governance and competitive advantage in family-controlled firms. Entrepreneurship, Theory, and Practice, 29(3), Chandler, G. N., & Lyon, D. W. (2001). Issues of research design and construct measurement in entrepreneurship research: The past decade. Entrepreneurship, Theory, and Practice, 25, Crook, T. R., Shook, C. L., Morris, M. L., & Madden, T. M. (2010). Are we there yet? An assessment of research design and construct measurement practices in entrepreneurship research. Organizational Research Methods, 13(1), Dean, M. A., Shook, C. L., & Payne, G. T. (2007). The past, present, and future of entrepreneurship research: Data analytic trends and training. Entrepreneurship, Theory, and Practice, 31(4), Desai, A., Kroll, M., & Wright, P. (2005). Outside board monitoring and the economic outcomes of acquisitions: A test of the substitution hypothesis. Journal of Business Research, 58(7), Hasan, M. (2002). Contemporary issues in corporate governance. Sydney. Hilb, M. (2006). New corporate governance: Successful board management tools (2nd ed.). Berlin: Springer. Hitt, M. A., Gimeno, J., & Hoskinsson, R. E. (1998). Current and future research methods in strategic management. Organizational Research Methods, 1(1), 6-44.

7 MOVING TOWARDS A NEW ERA IN CORPORATE GOVERNANCE RESEARCH METHODS 1087 Lynall, M. D., Golden, B. R., & Hillman, A. J. (2003). Board composition from adolescence to maturity: A multitheoretic view. The Academy of Management Review, 28(3), Nicholson, G. J., & Kiel, G. C. (2004). Breakthrough board performance: How to harness your board s intellectual capital. Corporate Governance: The International Journal of Business in Society, 4(1), Sekaran, U. (2007). Research methods for business (3rd ed.). New York: John Wiley. Shook, C. L., Ketchen, D. J., Cycyota, C. S., & Crockett, D. (2003). Data analytic trends and training in strategic management. Strategic Management Journal, 24(12), Taylor, B. (2003). Corporate governance: The crisis, investor losses, and the decline in public trust. The 6th International Conference on Corporate Governance and Board Leadership, Henley. Wentges, P. (2003). Corporate governance und shareholder ansatz. Wiesbaden.